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Performance Bonds For Real Estate Escrows

The world of distressed real estate (only about 90 of my past 100 transactions) is a funny one; all the rules are different.

The REO sellers are pretty simple.  They have a take it or leave it policy when it comes to negotiations, escrow terms, etc..  Some short sellers however, can be like the  “bait and switch” mortgage brokers of last decade.  The “bait and switch mortgage brokers” would issue a fictional good-faith-estimate prior to pulling credit, getting a good valuation estimate, and checking income.  One week prior to escrow, a “surprise” was discovered, changing loan terms and putting the potential escrow in jeopardy.

Not all “oops” moments were conceived in evil nor should they be attributed to professional incompetence; sometimes; s**t just happens.

A similar trend has developed in short sale real estate agent community.  Like the bait-and switch mortgage broker, some short sale agents low-ball the price, collect offers, submit them to the bank, and pray for a reasonable settlement.  Oftentimes, the counters are far apart from the originally accepted offer.  Sometimes, the term changes are issued after the buyer has become emotionally vested to the property or invested  funds to secure a loan approval for purchase.

I’ll repeat myself; sometimes, s**t just happens.  Other times, the surprises DO come from professional incompetence, poor disclosure and communication, or just plain old deceit. The result is an unhappy buyer or seller.  The collateral damage is consumer mistrust in every agent involved in the transaction.

Rather than vent about the reasons, let’s consider a private market solution to the problems:  Performance Bonds.

Performance bonds, issued by independent insurance companies, could seriously contribute to the #rtb movement.  They can be offered by mortgage originators and listing agents alike.  The credibility of offers to purchase, and listings for sale,  could rise with the attachment of a performance bond into the escrow terms.  Buyers could confidently place non-refundable escrow deposits, knowing that the lender has indemnified them from loss.  Likewise, listing agents could rely on timely execution of the escrow if a lender performance bond were attached.

Performance bonds could lend confidence to short sale transactions, too.  Buyers could enter into agreements, proceed with the due diligence required (along with the commensurate expenses), knowing they could be reimbursed for those expenses if the sellers and or their agents couldn’t perform.

Bonding companies would assume a good amount of risk but they can be well compensated to assume that risk.  They would have to analyze performance statistics about mortgage originators and/or real estate agents, consider transaction specific details (borrower qualifications or seller financial status) and,  the reputation of bank loss mitigation departments (for sellers) and bank underwriting guidelines (for lenders).  If a legitimate “bondable amount” is 2% of the purchase price, different premium fees could be assessed after analyzing agent/originator reputation.

What intended effects would bonding have?  The #rtb movement could  abandon the “restrictive licensing” laws it currently supports.  Apprentice programs, we’ve discussed here for years, might take root because rookies might not have established the reputation to secure a bond.  Finally, we may inspire consumer confidence in an industry where the public opinion is unfairly focused on the few transactions that go awry rather than the hundreds that go according to plan.

Licensing is not the answer.  Agent and originator licenses and about as unique as a blond in a Newport Beach nightclub.  A higher degree of transaction supervision, from designated real estate brokers and HUD licensees could be but the economics of the industries precludes it.  Transaction supervision then, could be effectively “outsourced” to a third party with a profit motive (the bonding agent).

Laying cash on the line could solve this problem.  Bonding agencies could very well provide the “Good Housekeeping Seal of Approval” we seek, for industry participants whom are deserving.

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